Robin Hood took from the rich to give to the masses in Sherwood Forest. The OECD is copying that with a two-pillar plan to take income from offshore subsidiaries of big groups to give to governments of the masses in 141 countries, including Israel. Pillar 1 proposes to reallocate profit. Pillar 2 proposes a minimum corporate-tax rate of 15%. The latest start date is “in 2024.”
The OECD issued a “Progress Report on Amount A of Pillar One” for public consultation in the period July 11-August 19, 2022. Amount A is excess profit (see below). The progress report reads like an unfinished symphony. Comments in this article are being submitted to the OECD.
As icing on the OECD’s cake, the US Congress has just passed a 15% minimum US federal income-tax rate for big corporations in the Inflation Reduction Act.
Background: Until recently, US tech giants could park their intellectual property (IP) and most profits in tax havens. So the rules are changing.
The OECD twin-pillar package is meant to share out the tax cake in an orderly fashion. Will this be fair and consistent, or will multiple overlapping taxes be due? Will Israel get much?
Pillar 1: What the OECD proposes
Only the world’s 100 to 150 biggest groups are on the line under Pillar 1. If group annual revenues exceed €20 billion, 25% of pretax profits over 10% of adjusted profit may be reallocated for tax purposes to countries where the consumers are.
Exceptions would apply to extractive and regulated financial groups. Individual countries, such as Israel, would only get a share if revenues there (under nexus/sourcing rules) exceed €1 million generally, or €250,000 for poorer countries with GDP below €40b.
Cake-sharing nexus rules
Detailed nexus/sourcing rules are prescribed for allocating revenues and profits among countries. Briefly, the rules include: finished goods sold to final customer – place of delivery; location-specific services – place of performance; online advertising – location of viewer; other advertising – place of display or reception; online intermediation services (i.e., online platform) – location of purchaser 50%, location of seller 50%; most other services and digital products – place of use.
Transitional rules are prescribed.
Cake-slicing rules
Revenues and profits must be allocated among countries using reliable indicators. “Enumerated reliable indicators” are: those relied upon for commercial purposes, or verified information from a third party, or supported by another indicator, or verified in another manner. If necessary, an “allocation key” may be used, usually based on UN or World Bank or GDP statistics
A “knock out” rule would allow tax authorities to disregard another jurisdiction where there are legal, regulatory or commercial reasons why it can be reasonably concluded that revenue did not really arise there.
Unfinished symphony
The OECD admits not all its “building blocks” are ready, and it is still working on many detailed aspects. These include: elimination of double taxation, marketing and distribution “safe harbor,” simplified administrative process, exchange of information, “tax certainty” (i.e., dispute resolution procedures) and a Multilateral Convention (“MLC”) making it legal. Quite a lot of missing music.
What’s in it for Israel?
Israeli groups will probably be too small to pay Pillar 1 tax abroad. But large foreign groups may be exposed to paying Israel tax on Israeli Pillar 1 profits – but apparently not if their activity relates to Mediterranean gas exploration or regulated financial activities.
The amount of such Israeli profit remains to be seen. In particular, what about high past and present R&D expenses in California or elsewhere of big tech groups?
Comments on the Pillar 1 proposals
Double/multiple tax relief needs sorting out sooner rather than later.
What about indirect taxes, such as EU VAT and US sales tax following the Wayfair case in the US Supreme Court –these all aim to impose tax in the country of the consumer in addition to Pillar 1.
The situation regarding R&D and other expenses needs clarifying.
What about the USA generally? Does its federal tax legislation now meet OECD Pillars 1 and 2 requirements following the passing of the Inflation Reduction Act? What about state sales taxes?
The rules for allocating revenue and profit between countries seem subjective and open to alternative and inconsistent interpretations.
Will these proposals override the relatively new OECD multinational instrument (MLI) and bilateral tax treaties?
To sum up, the OECD is less effective than Robin Hood.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@h2cat.com
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.